72 – The Rule of 72

Rule Of 72 according to Investopedia:
What is the ’Rule Of 72’
The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72:

Note that a compound annual return of 8% is plugged into this equation as 8, not 0.08, giving a result of 9 years (not 900).

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COMPOUND INTEREST
ANNUAL PERCENTAGE YIELD – APY
COMPOUNDING
RETURN
BREAKING DOWN ’Rule Of 72’
The rule of 72 is a useful shortcut, since the equations related to compound interest are too complicated for most people to do without a calculator. To find out exactly how long it would take to double an investment that returns 8% annually, one would have to use this equation:

T = ln(2)/ln(1.08)=9.006

Most people cannot do logarithmic functions in their heads, but they can do 72 ÷ 8 and get almost the same result. Conveniently, 72 is divisible by 2, 3, 4, 6, 8, 9, and 12, making the calculation even simpler.

The rule can also be used to find the amount of time it takes for money’s value to halve due to inflation. If inflation is 6%, then a given amount of money will be worth half as much in 72 ÷ 6 = 12 years. Nor does the unit have to be money: the rule could apply to population, for example.

Adjusting For Higher Rates
The rule of 72 is reasonably accurate for interest rates between 6% and 10%. When dealing with rates outside this range, the rule can be adjusted by adding or subtracting 1 from 72 for every 3 points the interest rate diverges from 8%. So for 11% annual compounding interest, the rule of 73 is more appropriate; for 14%, it would be the rule of 74; for 5%, the rule of 71.

For example, say you have a 22% rate of return (congratulations). The rule of 72 says the initial investment will double in 3.27 years. Since 22 – 8 is 14, and 14 ÷ 3 is 4.67 ≈ 5, the adjusted rule would use 72 + 5 = 77 for the numerator. This gives a return of 3.5, meaning you’ll have to wait another quarter to double your money. The period given by the logarithmic equation is 3.49, so the adjusted rule is more accurate.

Thanks, Sogjam. I am a big proponent of dividend growth stocks. Einstein once said that compound interest is “the eighth wonder of the world.” For those companies that regularly raise their dividend payments, and by roughly the same percent each year, you can estimate future payments based on the rule of 72. By choosing the right companies, at an average 10% annual dividend increase after 35 years or so you will receive your initial investment as a dividend–each and every year. At business school I was taught that a company’s dividend strategy is irrelevant to the company’s value, and hence,… Read more »

Thank you for your very informative comments and the awesome link, savethemanatee. I am thankful that you mentioned DRIPs which some companies offer 1%-5% discounts on additional purchases once Investor relations has been contacted and you are set up. I’d prefer to continue the discussion here as It shall be consolidated, instead of scattered throughout the site. Best2You-Ben

Apologies in advance if any of what follows is too basic for this community–thought I’d start at the beginning. The basic premise behind dividend growth investing is to focus on those companies with steadily and consistently growing dividends. The goal is to maximize dividend payments 15, 20, even 30 years from now. Thus, these are, by definition, buy-and-hold investments in companies that you expect to last forever. Since we are dealing with such a long-term horizon, it’s imperative to limit risk, and one good way to do that is to ensure this portion of your portfolio imitates the broad market… Read more »

Fantastic explanation, STM — thanks! I’m sure many readers know this intuitively, but we also need to remind ourselves often of what really matters when trying to build wealth over time. Sometimes the simple lessons are those most easily forgotten.

the reit’sand the mid mlp’s pay great Ihave money with gabelli fund that continues to pay 288$ per quarter on every 7500 invested. That’s 12,000 per yr. on less than 100,000 invested. Plus it grows from there.

Yeah, I wasn’t sure how much background to include. Most of this is fairly rudimentary, but at the same time many investors–especially young investors–are dismissive of dividend-paying stocks as “for old people,” and I thought it could be helpful to explain why they should be an important part of any portfolio. I can think of nothing more enticing than being able to retire early and having 100% of my salary replaced by annual dividends (at a lower tax rate) . . . and to get a 10% “raise” every year thereafter. If you start early enough, and do it right,… Read more »

Now for the specific equities $EQUITY that you have researched for the young & old? 😉
Remember that you may will those equities to your beneficiaries in event of you becoming Spirit. 🙂 Long #SaveTheManatee, #StockGumshoe, #Gummune, #Spirit -Benjamin

Most of the DGI companies appear to me to be overpriced by quite a bit right now, so it’s hard to recommend any specific purchases, but we can go through different industries and see what we can identify. I have my eye on a bunch of companies. Although when it comes to buying dividend stocks with a long-term horizon, it’s definitely true that the initial share price has much less of an effect than dividend growth, I still have a hard time pulling the trigger unless I feel as though the stock is in bargain territory. Recently I bought $ABT,… Read more »

Gold & silver DIVIDEND PAYMENT RATES…MAJORS AND ROYALTY COMPANIES cp[ied from: http://www.stockgumshoe.com/2015/06/microblog-a-major-turning-point-on-the-horizon/comment-page-2/#comment-4766969 Hi everyone, in another post I suggested that the small dividends paid by gold and silver miners and royalty companies were deserving of more attention in a ZERO INTEREST RATE ENVIRONMENT, and that the old argument of “gold does not pay interest” is true about physical but is not necessarily the case in miners and royalty companies. Previously my main consideration in thinking about gold and silver was stock price appreciation potential on account of the underlying commodity prices; and this is still the major consideration. But with… Read more »

Many of the dividend growing stocks are the mega-caps that everyone has heard of: Microsoft, Wal-Mart, Pfizer, P&G, Pepsi, etc. These are easy. I prefer to try to identify smaller, less-well-known companies that have many of the same attributes but may be poised for quicker growth–both earnings growth AND dividend growth, that may belong in the dividend portion of a portfolio alongside the behemoths. One company I’ve been looking at recently is financial services company Lazard Ltd. ($LAZ). Lazard was founded in 1848 and is headquartered in Bermuda. A financial advisory firm, Lazard is best known as a company offering… Read more »

This is a bit off topic as it involves a strategy to time trading equities that offer dividends: Glenn henderson says: February 28, 2016 at 12:40 pm http://www.stockgumshoe.com/2013/02/microblog-dividend-trifecta-or-daily-paycheck-strategy/comment-page-1/#comment-4715834 Use dividend calendar .com. They list by the day all dividend stocks paying. I take the ones 8% and higher. Buy them 5-10 days before they go ex dividend. Many will go up higher than the dividend they pay. Sell those pocket the growth. The others hold until exdividend. If they are green sell them at the open. If there red hold them until the market bounces them back. Look at bgc… Read more »

Dividend Kings List 08/2016
Posted: 02 Aug 2016 11:12 PM PDT
Dividend growth investing may not be for everyone, but I am a fan. I like the idea of receiving tax efficient payments from long established companies with an established track record of annually increasing their payments to shareholders. The longest dividend growth history have dividend kings. Those stocks raised dividends by more than 50 consecutive years without a break. Today I like…

Good morning Ben— As described earlier, I love dividend-paying stocks, esp. those that regularly increase payments. Most today seem to be funding their dividends through debt, which is very very scary. Still think the market is at risk for taking a bath over the next three months, at that point may be a good time to get into some of these. Emerson is a DGI favorite. The others this author highlights are growing very slowly and have monumental amounts of debt–even KO which didn’t used to just a few years ago. I love Starbucks as a company that is just… Read more »

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